Accounting 217

Income Statement Presentation

2 different forms of income statement: Single-step - All data classified into 2 categories revenues expenses Multiple-step - Shows several steps in determining Net income or loss Net sales Gross profit Income from operations Income before income tax Net Income

Sales of Merchandise [perpetual system]

2 entries required: 1. Record sales revenue* 2. Record cost of sale (and removal from Inventory) *Sales taxes are not recorded as revenue

Calculating Cost of Goods Sold @ the end of an accounting period

3 steps are required: - Calculate cost of goods purchased: - Determine ending inventory via inventory count - Calculate the cost of goods sold (COGS)

Inventory Systems

Flow of costs for a merchandising company: - Beginning inventory + purchases = cost of goods available for sale - Once sold, these costs are assigned to cost of goods sold - Goods left over are ending inventory One of 2 systems is used to account for inventory and cost of goods sold: - Perpetual inventory system - Periodic inventory system

Evaluating Profitability: Ratios

Gross Profit Margin: Measures the gross profit expressed as a % of net sales Higher is generally better Gross profit margin = Gross profit Net sales Profit margin: Measures the % of each $ of sales that results in profit Profit margin = Profit Net sales Higher is generally better

Inventory Sales Example [perpetual system]

On October 3, Toys R Us sells 6 Hatchimals on account to Mastermind Toys for $600 terms 2/10, n/30, FOB shipping point. The cost of these Hatchimals was $300. Freight charges of $100 are paid with cash on October 5. On October 10, Mastermind Toys returns $150 of Hatchimals to Toys R Us. The cost of these Hatchimals was $75 On October 12, Mastermind Toys pays the total amount owing. Record these transactions on Spin Master Toys' books.

WHEN is ownership of the merchandise transferred?

Ownership of the goods passes: When the goods are received by the buyer (i.e. @ the destination point) Freight paid by seller and thus is not part of the cost of merchandise purchase: When the goods are shipped (i.e. @ the shipping point) Freight paid by buyer is part of the cost of merchandise purchased

Types of Inventory Systems 2

PERPETUAL Detailed records are kept for the cost of each product purchased and sold These records are updated continuously (perpetually) for purchases and sales A physical count is done at least once a year to adjust perpetual records to actual This system enables the effective control of inventory which is an important asset PERIODIC Detailed records of merchandise are not kept throughout the period Cost of goods sold is only determined at the end of the accounting period: Once inventory is counted Cost of goods sold = Beginning inventory + cost of purchases less ending inventory

Types of Inventory Systems

PERPETUAL Detailed records are kept for the cost of each product purchased and sold These records are updated continuously (perpetually) for purchases and sales A physical count is done at least once a year to adjust perpetual records to actual This system enables the effective control of inventory which is an important asset PERIODIC Detailed records of merchandise are not kept throughout the period Cost of goods sold is only determined at the end of the accounting period: Once inventory is counted Cost of goods sold = Beginning inventory + cost of purchases less ending inventory [covered in Appendix A of Chapter 5]

Sales Discounts [perpetual system]

Purchase discount: discount is offered to encourage early payment of a balance due decreases sales recognized via *Sales Discounts (a contra-account to Sales) Example: 2/10, n/30 - 2/10 = if invoice is paid within 10 days, buyer is entitled to a 2% discount - n/30 = invoice is due in full within 30 days - Recorded separately when payment made. Results in a decrease to Merchandise Inventory account Quantity discount: gives a price reduction according to the volume of the purchase: - Not recorded separately - discounted price is recorded as cost of purchase

Purchase Discounts [perpetual system]

Purchase discount: discount is offered to encourage early payment of a balance due. Example: 2/10, n/30 - 2/10 = if invoice is paid within 10 days, buyer is entitled to a 2% discount - n/30 = invoice is due in full within 30 days - Recorded separately when payment made. Results in a decrease to Merchandise Inventory account Quantity discount: gives a price reduction according to the volume of the purchase: - Not recorded separately - discounted price is recorded as cost of purchase

Purchase Returns & Allowances [perpetual system]

Purchase return: Merchandise may be returned by the buyer to the seller for a cash refund or credit Purchase allowance: Merchandise may be kept by the buyer, if the seller is willing to give an allowance (deduction) from the purchase price In both cases, the result is a decrease to the cost of goods purchased via CR Inventory

Purchase of Merchandise [perpetual system]

Purchases are recorded in the Inventory account Includes all costs to get merchandise to place of business and ready for resale: - Includes freight and applicable taxes - Less purchase returns, allowances, discounts Credit purchases (i.e. Accounts Payable) are supported by a purchase invoice

Income Measurement Process

Revenue - Sales revenue (from the sale of merchandise) Expenses: 1. Cost of goods sold (COGS) - total cost of merchandise sold in a period 2. Gross profit = Sales revenue less cost of goods sold 3. Operating expenses - incurred in the process of earning sales revenue

Ownership of the goods passes:

When the goods are received by the buyer (i.e. @ the destination point) Freight paid by seller and thus is not part of the cost of merchandise purchase When the goods are shipped (i.e. @ the shipping point) Freight paid by buyer is part of the cost of merchandise purchased:

Periodic Inventory System

Compare to perpetual inventory system: - Differences in recording purchases - Differences in recording sales - Cost of goods sold is calculated only at the end of a period, using ending inventory count

What is Financial Accounting?

Accounting is the information system that identifies and records the economic events of an organization and the communicates them to a wide variety of interested user

Operating Cycle

Longer for a merchandising company that for a service company: - Merchandise must first be purchased before it can be sold - Adds an additional step to the cycle

Sales Returns & Allowances [perpetual system]

Sale return: Merchandise may be returned by the buyer to the seller for a cash refund or credit so the seller will put it back into its Inventory 2 entries required: - 1. Reverse cost of sale (and put back in Inventory) - 2. Reverse sales revenue* and AR/Cash Sale allowance: Merchandise may be kept by the buyer, if the seller is willing to give an allowance (deduction) from the purchase price via a Sales Returns & Allowances a/c *contra account to Sales

Differences between service and merchandising companies

Service companies perform services as their primary source of revenue (e.g. law firm) Merchandising companies buy and sell inventory (e.g. Loblaws): - Retailers sell to consumers - Wholesalers sell to retailers - Manufacturers produce goods for sale to wholesalers of others